HMRC suspects big firms of underpaying £1.4bn in employment taxes through IR35 rules


According to HMRC, large corporations underpay £1.4 billion in employment taxes by claiming "hidden employees" for tax purposes.


The Government tax enforcement arm is worried that some large businesses are underpaying Employers' National Insurance contributions by classifying some of their employees as self-employed when they should be treated as employees for tax purposes, according to the international law firm Pinsent Masons.


Both employees paid by companies on a self-employed basis and those who are paid through a personal service company (PSC) and comply with the rules may be included in this.


In April 2021, IR35, the tax code for non-payroll employees, underwent changes. When using PSCs to hire people, large and medium-sized enterprises are subject to increased tax and regulatory issues.


In the past, the contractor was in charge of implementing IR35 and paying the required employment taxes.


Penny Simmons, legal director at Pinsent Masons, said that the figure suggested that HMRC still believes that many large businesses are continuing to pay contractors on a self-employed basis when they should be employees for tax purposes.


"Large organizations need to evaluate how they use off-payroll employees and handle employment tax issues," Simmons added. Businesses should ensure they have robust onboarding procedures in place and are applying the IR35 rules correctly, whilst also having a process for making comprehensive employment tax status determinations for all workers to be paid on a self-employed basis.


"Off-payroll personnel is one of HMRC's biggest priorities at the present, and even companies that have tried to abide by the IR35 laws are finding themselves in the sights," said Steven Porter, a partner at the company.


"HMRC suspects that big companies paying employees on a self-employed basis are costing it more than a billion pounds annually. Off-payroll employees will move to the head of the line when HMRC launches investigations due to those numbers.